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January 19th, 2012

Automated valuation models could be understating your home’s value

by Gina Pogol

 

5-price-reducedThe use of automated valuation models (AVMs) can make it faster, easier and cheaper for mortgage lenders to value your home. But do they understate your home’s value and will they cost you money?

Heads up!

If you plan to take out a home equity loan, know that the way your lender determines your home’s value could raise the cost of your loan or even get you declined. The increasing popularity of AVMs may get you a less-accurate valuation.

How does an AVM work?

There are four models that can be used in the AVM process:

  1. Indexing model. Tracks price movements in your neighborhood and applies that data to a known value
    to calculate the home’s value. So, if prices in your neighborhood increased at a rate of 2 percent per year, an AVM might take your home’s purchase price and apply that appreciation rate to it.
  2. Expert system. Emulates the thought processes of a human appraiser, selecting comparable sales based on similarities of physical characteristics (e.g., size, age, condition, etc.). The results are mathematically adjusted for differences to come up with a value.
  3. Regression analysis model. Employs complex equations to discover the statistical relationship between one or more property characteristics and the value of the property.
  4. Neural network. Identifies the statistical relationships between home prices and their associated physical characteristics (e.g., bedrooms, number of stories, square footage or age of construction).

Shortcomings

The Government Accountability Office (GAO) says that data sources for AVMs include tax records and information kept by county recorders and multiple listing services (MLS). The GAO found several shortcomings in how these models identify a home’s value, including:

  • Assessed values for property tax purposes are not always current and are themselves often generated from statistical models
  • Information on property sales kept by county recorders is not necessarily complete or consistent because disclosure and data collection methods can vary by county
  • MLS data can be inaccurate and outdated because real estate professionals enter the data themselves
  • AVMs tend to be less reliable in neighborhoods with houses built at very different times and on
    different-sized lots
  • AVMs may not include information on property condition, assuming instead that all properties are in average condition

The GAO says that AVMs never should be considered appraisals.

Your HELOC after en encounter with an AVM

Borrowers have sued Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co. and other big lenders, claiming that banks are misusing AVMs in order to restrict the amount that customers can borrow against their home equity lines of credit (HELOC).

HELOCs are popular among homeowners for ensuring small business cash flows, funding college tuition and financing ongoing home improvements. Cuts to HELOCs can ruin businesses, kill education opportunities, cause drops in credit scores and create other financial difficulties.

Homeowners adversely impacted by AVMs have little recourse unless they pay for an appraisal themselves.

AVMs impact on HARP and HAMP

AVMs are also used by mortgage servicers when evaluating eligibility for government mortgage assistance programs (such as HARP refinances and HAMP modifications) and short sale programs. An incorrect valuation could cause your lender to require too high a price in a short sale. It could disqualify you for a HARP refinance, or skew the net present value test for a HAMP loan modification, causing your lender to choose foreclosure over modification. Again, your only hope may be to commission your own appraisal from a licensed appraiser.

Determining the proper value of your home can make or break your chances of approval. If your lender is using an AVM to find your home’s value, be sure you know the drawbacks associated with this “faster and easier” process.

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One Response to “Automated valuation models could be understating your home’s value”

  1. Fast, Cheap, but Unreliable? AVMs and Home Values | Miami Agent Magazine Says: January 26th, 2012 at 11:26 am

    [...] quick and easy, Gina Pogol of HSH documents several of AVM’s shortcomings in a recent article, some of which can prove [...]

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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